United States-Japan trade, commercial, and economic relations : hearing before the Subcommittee on Trade of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session, July 13, 1993 online

U.S. market access complaints, action by Japan to resolve those complaints is warranted.
Action is warranted because the U.S. and Japan should have fully equivalent
opportunities to participate in each other's markets, not because there is an imbalance in
our bilateral trade. Neither the imbalance nor its recent growth can be attributed to
market access impediments.

After falling 26% between 19X7 and 1990 (from $56 billion to $41 billion).
Japans trade surplus with the United States has now grown to more than $49 billion.
However, no responsible analy,st credits this expansion of Japan's trade surplus to trade
banners. The culprit is Japan's recession.

U.S. exports to Japan grew by more than 100% — from $23 billion to $49 billion
— between 19X5 and 1990, but were flattened by Japan's recession. Meanwhile, Japans
exports to the United States continued to grow after 1990, a modest X7c, as the U.S.
economy grew anemically. Thus the growth in Japan's surplus reflects the relative
strength of our economy, not just its weaknesses.

Of course it has been argued that even at its recent "low water mark" of $41
billion, Japan's trade surplus with the United States is "intolerable." Indeed, legislation
has been introduced in Congress in recent years declaring any Japanese trade surplus with
the United States unacceptable and mandating the virtual elimination of the trade
imbalance. As appealing as this simplistic call may be for some, it is nonetheless true
that there is no justifiable economic rationale for adopting trade policies aimed at
eliminating a bilateral imbalance. (That is a good thing, of course, since the U.S. runs
trade surpluses with the European Community and Mexico among others.)

There is, in fact, sound logic for concluding that an imbalance of trade of some
magnitude between the United States and Japan is inevitable and not undesirable, .so long
as we bring our overall global external position into reasonable balance. The logic
behind this conclusion — based on the nature and composition of Japan's trade with the
United States — was persuasively presented to the Subcommittee in the recent testimony
of Fred Bergsten of the Institute for International Economics.

The real "imbalance problem" that both U.S. and Japanese policy should aim to
address is the excessive magnitude of the imbalance between Japan's unprecedented
global, current account surplus and the United States' persistent global, current account
deficit. These imbalances reflect, and indeed are determined by, mirror- image
imbalances in domestic savings and investment patterns in the United States and Japan.
it is these domestic imbalances that must be rectified in order to reduce our external
imbalances. U.S. fi.scal deficit reduction and higher rates of Japanese growth, combined
with the exchange rate adjustments that have already occurred, are the way to fix the
"imbalance problem."

A country's external financial position is determined by fundamental internal
factors. Thus, attempts to manipulate trade balances are bound to fail. If, for example,
the United States adopted protectionist policies to restrict imports of certain products, or
the United States forced Japan to expand imports of certain goods, and there were no
changes in the basic domestic factors underlying the imbalance, then our two economies
would compen,sate for these trade policy distortions. In the case of the U.S. example, we

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might import greater volumes of other, non-restricted goods. In the case of the Japan
exaitipie, it might also import fewer non-designated goods. The composition of our
imbalance may change — benefiting some companies and workers at the expense of
others — but the basic imbalance could persist. The imbalance could be artificially
reduced but only by the adoption of radical protectionist measures that would impose
huge costs in terms of reducing welfare in both countries.

THE IMBALANCE IN AUTOMOTIVE TRADE AND MARKET ACCESS

If a bilateral trade imbalance is not an appropriate justification for trade policy
action, then the existence of a sectoral bilateral imbalance provides even less
justification. That, of course, is a good thing since the United States enjoys sectoral trade
surpluses with most countries in such products as commercial aircraft, industrial
machinery, scientific instruments, chemicals, and pharmaceuticals among others.

Trade in automotive products comprises a substantial portion of the overall
imbalance in trade between the United States and Japan. The sectoral imbalance has
been relatively .stable in recent years, about $31 billion. Presently, it accounts for more
than 60% of the overall bilateral imbalance. That fact is inconte.stable. Equally
incontestable, we contend, is the fact that market access impediments have nothing to do
with this imbalance.

Trade in Vehicles: The Imbalance Problem. In 1992, Japan exported to the
United States S22.3 billion worth of cars, multipurpose passenger vehicles (MPVs), and
trucks. In 1992. the United States exported to Japan .$890 million worth of cars. MPVs.
and trucks. TTiis disparity in vehicle trade is cited by some as "evidence" of a closed
Japanese market. That conclusion of causal relationship lacks a foundation in facts.

The disparity is explained by two factors: (a) the relative strength of the U.S. and
Japanese auto industries, and (b) the level of commitment and effort U.S. and Japanese
auto companies have made to compete in each other's markets. The disparity reflects an
imbalance in competitiveness and commitment, not an imbalance in market access.

American consumers "discovered" Japanese vehicles when they turned to them
for their superior fuel economy during the "oil shock" of the late 1970s. What consumers
"discovered" was not only the superior fuel efficiency of Japanese vehicles but also their
superior quality and durability. To exploit this competitive advantage, Japanese
companies made large inve.stments to develop distribution and service capabilities, to
discern the special needs and tastes of American consumers and to modify their vehicle
designs to fulfill tho.se needs and tastes, and to build their vehicles to comply with the
very different regulatory requirements of the U.S. Government.

These market-driven actions resulted in a soaring demand for Japanese vehicles
and Japane.se exports to the United States in the early 'SOs until they were capped by
trade restraints. The pressure of trade restraints combined with sound business logic led
Japanese companies to make huge investments in U.S. manufacturing facilities. The
effect has been a dramatic decline in the number of Japanese vehicles exported to the
United States — Japan exported 1.66 million fewer vehicles in 1992 than in 19S6 — and
a corresponding increase in the number of Japanese-nameplate vehicles built in the
United States — from nothing a little more than a decade ago to 1.7 million in 1992.
The value of Japan's exports to the United States also fell but not in tandem with the
decline in the volume of export .shipments because of a higher-value mix of vehicles
exported from Japan and the yen's appreciation.

Trade in Vehicles: The Access Issue. The history just described explains one
side of the imbalance equation. But what about the other side of that equation, exports of
vehicles from the United States to Japan? Why are they so low'.'

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Market access impediments did play a role at one time. Japan's market was once
closed to imports and foreign investment as Japan pursued a policy of temporary "infant
industry" protection while it rebuilt its economy after World War II. But that was a long
time ago. Border measures were lowered during the lyfiOs and completely eliminated m
the 197()s. Since then, however, U.S. manufacturers have alleged that non-tariff barners
— standards/certification procedures and distribution — inhibit their access to Japan's
market.

Japan's standards and certification procedures are no more burdensome for
foreign than for domestic manufacturers. In fact, preferential procedures have been
established for small volume importers with the result that the regulatory "burden " the
Detroit automakers face in Japan is considerably less than the burden Japanese
manufacturers face in either Japan or the United States. Complying with legitimate
foreign governments standards is an obligation incumbent upon any company engaging
in foreign trade. So long as the Detroit automakers build their vehicles to U.S. standards
and then modify them afterward for sale in Japan, they will experience a self-imposed
disadvantage. This is a "chicken-egg" business problem, not a market access
impediment.

As for distribution, while people tend to forget that Japanese manufacturers were
anything but enthusiastically embraced by U.S. dealers when they arrived in the United
States in the \95i)s and 1960s, it is true that Americans today face a more difficult
situation today than Japanese companies faced in the United States 30 years ago. For one
thing, the cost of establishing distribution and sales networks in Japan today is high;
indeed, the cost of everything in Japan today is high after converting dollars into yen.
(This is one downside of the Administration's strategy of driving up the value of the yen:
it lowers the cost of U.S. exports in yen, but it also makes the cost of doing business in
Japan for American companies wanting to expand sales much higher.) Moreover, career
mobility in Japan, though rising, is still limited compared to the United States so
recruiting experienced personnel is a challenge. In economic terms, these are "barriers to
entry" but they are not "'trade barriers."

Even taking at face value — which we do not — the market access complaints of
the Detroit automakers, they still cannot explain the low level of Detroit automakers'
sales in Japan. Germany and Britain both export more vehicles to Japan than do the
Detroit automakers. France and Sweden export nearly as many. As it has become
fashionable to make third country comparisons to reach judgments about the relative
openness of markets, it is worth noting that the market share of European automotive
manufacturers in the United States and in Japan is virtually identical. If the U.S. market
is "open," what does that say about the Japanese market?

The fact is that the Detroit automakers have not made a serious effort to enter the
Japanese market. There is some evidence that this situation may be changing. It remains
to be seen whether this newfound interest in the Japanese market will remain serious and
consistent over the long term.

Fewer than 17f of the models the Detroit automakers sell in Japan are powered by
engines of 2,000 cc or le.ss. That means the Detroit automakers are competing for just
14% of the Japanese market because S6% of the cars sold in Japan are equipped with
engines of 2,000 cc or less. Even worse, X4% of U.S. auto exports to Japan are equipped
with engines of 3,000 cc or more. That market segment accounts for just 3% of Japanese
sales.

Even now. only one Detroit automaker's model made in the U.S. with its .steering
column on the right hand side is currently sold in Japan. There is some demand for left-
hand drive in Japan (and some European manufacturers offer both left- and right-hand

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drive) but that is a novelty market, accounting tor an extremely small share ot Japanese
demand.

Only 10% of the Japanese market is accounted for by sales of vehicles that cost
more than 3 million yen. Ninety percent of Detroit automakers vehicles are priced over 3
iniilion yen.

Given the relative competitive strengths of Japan's manufacturers and negative
public perceptions in Japan about the quality of Detroit automakers products (fed by
negative perceptions in the United States and the Detroit automakers' demands for
protection from Japanese competition), the Detroit automakers have appeared content to
participate in the market through their equity investments in Japanese companies. With
their dramatically improved levels of quality and their potentially stronger price
competitiveness as a result of the yen's appreciation, the prospects for the Detroit
automakers in Japan have brightened. To succeed, however, they have much to do.
Surmounting trade barriers is one thing they need not worry about.

... the notion that the Japanese should open their market to Detroit
automakers cars is really a non-issue. The Detroit automakers haven t
done the necessary spadework. .And technically, the Japanese market is
open now ...

In their new book that drew considerable attention at the Subcommittee's hearing
— RECONCILABLE Differences? — authors C. Fred Bergsten and Marcus Noland write
that:

Questions remain, however, as to the seriousness of the Detroit
automakers' commitment to selling finished cars in the Japanese market.
... Indeed, some have argued that the Detroit automakers have no real
interest in penetrating the Japanese market — that the actual goal of these
complaints is to justify protectionism at home.

Until the Detroit automakers make a serious and sustained commitment to export to
Japan — by catering to Japanese consumers' distinct preferences in the design of their
vehicles, by building vehicles to meet Japanese standards rather than modifying them car
by car, and by doing more than just talking about the challenges of distribution — this
su.spicion will be a compelling one.

Trade in Automotive Parts. Government officials and industry experts in both
the United States and Japan concur that there are significant problems with the statistics
measuring trade in auto parts because many parts are classified in other product
categories. There is no doubt about the basic trends and orders of magnitude, however.
As Japanese manufacturers have invested in production facilities in the United States and
as the fleet of Japanese vehicles {both U.S. -built and imported) has expanded and aged.
exports of Japanese auto parts — both "original equipment" and "aftermarket" — to the
United States have grown. They rose more than 300% from 1985 to 19X9 and have since
leveled off at between %\() billion and $1 1 billion annually. U.S. auto parts exports to
Japan have grown even more rapidly but started from a much smaller base; by the
understated official statistics they ju.st exceed $1 billion. This has produced an official
trade imbalance in auto parts of about $10 billion over the past several years.

It has been alleged that the low level of U.S. auto parts exports to Japan, the high
level of Japanese auto parts exports to the United States, and the sales of Japanese-owned
auto parts companies in the United States to new entrant manufacturers are evidence of
"market access" impediments, namely an unwillingness on the part of Japanese and
Japanese-owned American companies to do business with non-Japanese firms. As a U.S.
Treasury official explained to a Japanese audience recendy: '"We are focusing on sectors.

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like automobile parts, where market forces do not hold sway because of close
connections between ... firms and suppliers..." While the trade statistics and
procurement data are undeniable, the conclusion drawn from them — of "market access '
impediments or anticompetitive practices — is nevertheless wrong. The purchasing
practices of Japanese automotive companies are strongly market driven and they have
been highly pro-competitive, not anticompetitive.

Analysts and observers of the U.S. auto industry during the IMSOs were quick to
acknowledge the severe competitiveness problems of the Detroit automakers. They were
not so quick to understand that the Detroit automakers' relationships with and capabilities
of U.S. parts suppliers were also part, a substantial part, of the problem.

When Nissan first began manufacturing operations in the United States, there
were few U.S. suppliers that could satisfy our quality, price, and delivery purchasing
criteria, even for relatively unsophisticated generic parts. Because, with few exceptions,
U.S. suppliers lacked product development skills — they relied upon the Detroit
automakers to provide them with complete component designs — they were also unable
to participate in Nissan's product development system for sophisticated parts. Supplier
firms in the U.S. and Japanese automotive industries traditionally have played very
different roles; much more is expected of suppliers in the Japanese production system.
As a result, few U.S. firms were able to meet our fourth purchasing criteria, product
development capabilities.

Like the U.S. vehicle industry, the U.S. supplier industry has taken impressive
strides in recent years. Once again, two factors have been at work in the industry's
restructuring: (I) "traditional" U.S. suppliers remaking them.selves, and (2) the entry of
new competitors through foreign investment. Foreign-owned supplier firms have now
become an integral part of the U.S. supplier industry. "Traditional" U.S. firms, while
still not the match of the best Japanese supplier companies, have reduced their defect
ratios and sped up their delivery capabilities. Their price competitiveness vi.s-a-vis
imports has also strengthened with the appreciation of the yen. And a growing number
have developed stronger product development capabilities. A recent research study
prepared by the Boston Consulting Group concluded that:

...[W]hile it is true that traditional suppliers' competitiveness in mass
production has dramatically imporved in recent years, they still lag behind
their Japanese counterparts both in the U.S. and in Japan in terms of their
ability to adapt to deliver their output on time at each stage of product
development. Many of them also lacked the ability to contribute
engineering know-how and innovative concepts.

As for NLssan, we have dramatically expanded our ability to work with U.S.
suppliers — through our creation of Nissan R&D in the United States, by NMMC's
launching a supplier-support program to advise supplier firms on how to improve their
production proces.ses, and by our parent company's expanding its capabilities to work
with American suppliers at its Technical Center in Japan. Similar developments are
taking place across the industry.

Far from being anticompetitive, the effects of Japanese companies' purchasing
practices have been strongly pro-competitive. The demanding quality standards of
Japanese and Japanese-owned American firms have forced American suppliers to
improve — not just to sell to the new entrants but also to keep the business of the Detroit
automakers. And as the Detroit automakers and U.S. suppliers have embraced aspects of
the Japanese automotive production system, both have benefited from the shorter product
development cycles, stronger productivity, and improved quality that the system yields.
Once again, restructuring has been difficult and painful, but it is producing a more
competitive and healthier U.S. supplier industry.

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The competitiveness and capability impediments to higher sales of U.S. auto parts
to Japanese and Japanese-owned American t'imis are falling. As a result, sales are rising.
Purchases by Japanese and Japanese-owned U.S. companies of U.S. auto parts have risen
from under %2 billion in FY 19X5 to S13.(S billion in FY 1992. The number of American
firms doing business with Japanese and Japanese-owned American vehicle manufacturers
in the same period has grown from fewer than 300 to more than 1,150. Even last year,
when the automotive markets of both the United States and Japan were stagnant, sales of
U.S. auto parts grew nearly 30%.

Just two years ago, the University of Michigan published a study that predicted
the 1994 auto parts trade imbalance between the United States and Japan would reach
S22 billion. According to press reports, the University will soon make a new prediction
that next year's deficit will be less than half that amount and may shrink further. Things
are moving in the right direction — in response to market forces.

Today's automotive marketplace is highly competitive. As anyone who has
shopped for a car lately can attest, Japanese nameplates as a group are competing at a
substantial price disadvantage. The notion that in this environment manufacturers can
make purchasing decisions that ignore market forces and rely instead upon "traditional
ties" between manufacturers and suppliers defies all common and business sen.se.

Tfie dramatic appreciation of the yen this year coming on top of its appreciation
since 19S5, gives Nissan and other companies that import parts from Japan (the Detroit
automakers as well as other new entrant firms) an additional incentive to 'buy American
and we are all working hard to cut our costs. But we compete on the basis of value,
however, and not just price. As a result, suppliers must continue to meet all of our
stringent purchasing criteria. Those that do meet our criteria — regardless of who owns
them — become Nissan suppliers.

CONCLUSION

Competition is hard: adjustment is often painful. The pain can motivate all those
involved — companies, workers and governments — to seek relief, ,to alleviate the
pressure, and to shift the costs to consumers (and, along with the blame, to foreigners).
Such efforts to run nd hide from global competitive pressures spawned the voluntary
export restraint agreements (VERs) of the 19S0s and proposals for 'voluntary' import
expansions (VIEs) in the 1990s. Yet such futile escapism fails even to begin to address
the underlying problem, the inability to compete. Worse, by providing a shield against
competition, it delays the adjustment that is required to become competidve.

As the President has said, "we must compete, not retreat." We must find a way to
make change our "friend" rather than our "enemy." Competition is ultimately a friend
that enriches the nation, spurs innovation, creates new customers, and promotes global
growth and prosperity.

The best way for the American automotive industry, of which we are proud to be
a part, to improve our competitiveness is to improve the quality and prices of our
products, and our delivery and product development capabilities. The best way to retard
our competitiveness is for the government to intrude into the market, as through quotas,
VIEs, dome.stic content or purchasing requirements, or other mandates. Such intrusion is
inconsistent with the commercial considerations that are the lifeblood of competition in a
free market economy.